Barr (A.G.) Regulatory News (BAG)

22 September 2015

A.G. BARR p.l.c.

INTERIM RESULTS FOR THE 6 MONTHS ENDED 25 JULY 2015

A.G. BARR p.l.c., the soft drinks Group, which produces and markets some of the UK's leading brands, including IRN-BRU, Rubicon and Strathmore, announces its interim results for the 6 months ended 25 July 2015.

Key Points 

· Total turnover was £130.3m (2014: £135.7m). Adjusting for the impact of discontinued business, turnover from ongoing business, including the recently acquired Funkin Limited ("Funkin"), declined 2.8%

· Adjusted* profit on ordinary activities before tax, interest and exceptional items increased by 3.3% to £17.8m. Statutory profit before tax decreased by 11.3% to £16.9m (2014: £19.0m)

· Free cash flow was £7.4m. Net debt stands at £19.9m (representing a net debt/EBITDA ratio of 0.4 times)

· The Funkin business is performing well against our pre-acquisition expectations

· Investment in our Milton Keynes site continued during the period with the successful commissioning of carton packaging capability and the commencement of the warehouse capacity increase project, due to be completed in early 2016

· Interim dividend of 3.36p per share (2014: 3.11p), an increase of 8.0% on the prior year

Commenting on the results, Roger White, Chief Executive said:

"We have delivered a number of significant system, business process and operational improvement projects over the course of the last 6 months, which will ensure we can successfully deliver our long-term growth and efficiency ambitions. These important changes have been made against a challenging backdrop of stretching prior year comparatives, disappointing weather and tough market conditions.

Our focus in the coming months will be to build our sales momentum and continue our long-term brand investment strategy.

Market conditions across the first half have been difficult and are forecast to remain so. The business is responding well to the market challenges but the weather since we last updated the market in July has been poor and, although we have recovered some sales momentum, it is not yet at the run rate we have targeted. Assuming a satisfactory trading performance in the key Christmas period, the Board now expects the Company to deliver a full year result broadly similar to that achieved last year.

As we look towards 2016 it is anticipated that the business will return to growth and begin to see the benefits of our improved operating platform."

For more information, please contact:

*Adjusted profit is defined as statutory operating profit before interest and tax and after adjusting for discontinued business (£1.0m), income associated with the 2014 termination of the Orangina franchise (£0.7m) and one-off transaction fees related to the acquisition of the Funkin Cocktails business (£0.7m).

Interim Statement

A.G. BARR has been through an extremely demanding 6 months in which we have delivered a substantial level of change and business improvement. The period began with the closure of the Tredegar factory and the subsequent successful clearance and sale of the site which completed in September 2015. During the early part of the year we also commissioned carton packaging capability at our Milton Keynes site, increasing capacity and improving flexibility in this important product format. The acquisition of the Funkin cocktail mixer business also completed in the period and we are pleased to report the business is meeting our high expectations. Alongside all of these highly visible actions and activities we have completed the planning and go-live of our Business Process Redesign (BPR) project which means we are now operating our business on a much more effective, modern and robust system and business process platform, capable of supporting sustained future growth.

As we reported in July, the go-live of our BPR project, despite our significant efforts to reduce executional risk, proved to be more challenging than anticipated. We experienced a period of difficult internal operating conditions post go-live which undoubtedly impacted our revenue performance and our customer service. We have now stabilised our systems and our focus is to realise the business benefits our new improved operating platform offers.

Trading

The soft drinks market in the period has been impacted by continued price deflation and very poor weather, especially in the north of the UK. As expected, our relative revenue performance has also been affected by the stretching prior year comparatives driven by better than average weather, strong execution behind the Glasgow 2014 Commonwealth Games and specific brand promotional phasing changes in the current year.

Total revenue for the period was £130.3m. Adjusting for the impact of discontinued business, turnover from ongoing business, including the recently acquired Funkin Limited ("Funkin"), declined 2.8%.

The total soft drinks market, as measured by Nielsen, experienced a 0.6% decline in revenue during the period, with modest growth of 1.4% in volume driven by strong performance in water and the continued positive performance of the energy drinks category.

We have maintained our long-term strategy of investing behind our core brands with further significant marketing activity. The prior year's activity was weighted to the first half in support of the Glasgow 2014 Commonwealth Games. This year's marketing programme sees a return to more normal phasing with greater proportionate activity later in the year.

In the period we have continued to see gross margin improvement benefiting from a combination of improved procurement conditions and further delivery of supply chain savings. Operating margins have been adversely impacted by a combination of lower volumes and our commitment to maintaining brand and business investment.

Adjusted* profit increased by 3.3% to £17.8m. Statutory profit before tax and exceptional items in the period was £16.9m.

In the period we have continued to support the long-term growth of IRN-BRU, developing the brand across the UK as a whole, with national TV and digital advertising and the development of an exciting sponsorship plan with both the English Football League and the Scottish Professional Football League.

The IRN-BRU brand continues to feature heavily in social media and digital channels, with positive consumer engagement during both our "Tartan Packs" promotion and our "Bru Planet" summer initiative.

We announced in late August a £5m investment at our Cumbernauld factory with the installation of new, high-speed glass filling capability. The investment will lead to the discontinuation of our returnable glass bottle system at the end of 2015. However moving to non returnable, recyclable glass will support the long-term development of this popular product format. The investment will also facilitate a number of exciting brand development projects in 2016.

In the period, we also announced phase 3 of the ongoing investment at our Milton Keynes site. Our plans include the building of increased warehouse capacity to improve operational efficiency, flexibility and costs, as well as the purchase of 4 acres of development land adjacent to the site. The total expected cost of this development phase, including the additional land for future expansion, is £11m.

Our actions to drive efficiency, as well as our continued investment in our asset base and brands, indicate our commitment to building a platform which will effectively support significant future growth across our whole business.

In the period we had no exceptional charges (2014: £2.5m).

Balance Sheet

Our balance sheet remains strong.

Intangible asset additions of £27.7m reflect the brand and goodwill valuation associated with the Funkin acquisition and the capitalisation of the investment in our BPR Project.

We also continue to invest in our tangible asset base. Cash capital expenditure during the period amounted to £7.9m, a combination of normal operational replacement and the acquisition of additional land at our Milton Keynes site.

Working capital continues to be tightly managed. The impact of lower receivables, a result of the Glasgow 2014 Commonwealth Games impact on comparatives, has more than offset slightly higher inventories.

The Group continues to benefit from strong cash-flow and low leverage. Net debt at 25 July 2015 stood at £19.9m, having funded the Funkin acquisition, the Milton Keynes land purchase and the BPR project investment.

Free cash flow of £7.4m was generated in the 6 month period. This was £3.8m less than in the comparable period in the prior year, arising from the addition of Funkin, underlying trading performance and slightly higher tax payments.

Dividend

The Board has declared an interim dividend of 3.36 pence per share, payable on 16 October 2015 to shareholders on the register on 2 October 2015. This represents an increase on the prior year of 8.0% and reflects the Board's confidence in the current financial position and the future prospects of the Group.

Board Update

In April, we were very pleased to welcome David Ritchie, CEO of Bovis Homes Group PLC, on to the Board as an independent non-executive director and Chair of the Remuneration Committee.

Outlook

Having delivered significant internal change over the last 6 months our focus is to return the business to sales growth. Market conditions across the first half have been difficult and are forecast to remain so. The business is responding well to the market challenges but the weather since we updated the market in July has been poor and, although we have recovered some sales momentum, it is not yet at the run rate we have targeted. Assuming a satisfactory trading performance in the key Christmas period, the Board now expects the Company to deliver a full year result broadly similar to that achieved last year.

Despite the specific challenges of the current year, our business is well placed and we remain confident in delivering further on our growth potential and continuing to generate long-term shareholder value. We expect to regain sales momentum and to see the benefits of improved operational execution as we enter 2016.

22 September 2015

*Adjusted profit is defined as statutory operating profit before interest and tax and after adjusting for discontinued business (£1.0m), income associated with the 2014 termination of the Orangina franchise (£0.7m) and one-off transaction fees related to the acquisition of the Funkin Cocktails business (£0.7m).

Ex-div date: 1 October 2015

Record date: 2 October 2015

1. General information 

A.G. BARR p.l.c. ('the Company') and its subsidiaries (together 'the Group') manufacture, distribute and sell soft drinks. The Group has manufacturing sites in the U.K. and sells mainly to customers in the U.K. with some international sales.

The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the U.K. The address of its registered office is A.G. BARR p.l.c., Westfield House, 4 Mollins Road, Cumbernauld, G68 9HD.

This consolidated condensed interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 25 January 2015 were approved by the board of directors on 24 March 2015 and delivered to the Registrar of Companies. The comparative figures for the financial year ended 25 January 2015 are an extract of the Company's statutory accounts for that year. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

This consolidated condensed interim financial information is unaudited but has been reviewed by the Company's Auditor.

2. Basis of preparation 

This consolidated condensed interim financial information for the six months ended 25 July 2015 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously the Financial Services Authority) and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The consolidated condensed interim financial information should be read in conjunction with the annual financial statements for the year ended 25 January 2015, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going concern basis 

The Group meets its day-to-day working capital requirements through its bank facilities. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group's forecasts and projections, taking account of reasonable sensitivities, show that the Group should be able to operate within available facilities. The Group therefore continues to adopt the going concern basis in preparing its consolidated condensed interim financial statements.

3. Accounting policies 

The accounting policies applied are consistent with those of the annual financial statements for the year ended 25 January 2015, as described in those annual financial statements except as noted below.

Changes in accounting policy and disclosures 

(a) New and amended standards adopted by the Group

The following revised IFRSs have been adopted in this consolidated condensed interim financial information. The application of these revised IFRSs has not had any material impact on the amounts reported for the current and prior periods.

• Annual Improvements 2010-2012 Cycle, IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 38 and IAS 24

• Amendments to IAS 19 Defined Benefit Plans relating to employee contributions

• Annual Improvements 2011-2013 Cycle, IFRS 1, IFRS 3, IFRS 13 and IAS 40

(b) New standards, amendments and interpretations issued but not effective for the financial year beginning 26 January 2015 and not adopted early 

A number of new standards and amendments to standards and interpretations are effective for future year ends, and have not been applied in preparing these interim financial statements. These standards and amendments are listed in the table below:

Management anticipates that the application of the above Standards and Interpretations in future periods will have no material impact on the consolidated financial statements of the Group.

(c) Restatement of segment reporting

(i) In the segment reporting to 25 January 2015 a misstatement has been noted between the gross profit for Carbonates and the Other segments. An element totalling £2.3m of gross profit in relation to Carbonates was reported within the Others segment. This has been restated in the table below. There has been no change to the total reported revenue or gross profit before exceptional items or any other element of the financial statements.

(ii) In the six months to 25 July 2015 a new enterprise resource planning system was implemented. This implementation included an alignment of the internal management reporting and the statutory reporting. The review concluded that some distribution costs previously recorded within operating expenses would be more appropriately recorded within cost of sales as this reflects more accurately the costs incurred in manufacturing products. This has resulted in a reduction in the gross profit of £3.4m in the year to 25 January 2015 and a reduction of £1.8m in the six months to 25 July 2015. Operating expenses have reduced by an equivalent amount in these periods with there being no change to the previously reported operating profit. There has been no impact on any other element of the financial statements.

4. Principal risks and uncertainties 

The directors consider that the principal risks and uncertainties which could have a material impact on the Group's performance in the remaining 27 weeks of the financial year remain substantially the same as those stated on pages 26-29 of the Group's annual financial statements as at 25 January 2015, which are available on our website, www.agbarr.co.uk.

5. Financial risk management and financial instruments 

The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk and price risk), credit risk and liquidity risk.

The condensed interim financial statements should be read in conjunction with the Group's annual financial statements as at 25 January 2015 as they do not include all financial risk management information and disclosures contained within the annual financial statements. There have been no changes in the risk management policies since the year end.

6. Segment reporting 

The Group's management committee has been identified as the chief operating decision-maker. The management committee reviews the Group's internal reporting in order to assess performance and allocate resources. The management committee has determined the operating segments based on these reports.

The management committee considers the business from a product perspective. This led to the operating segments identified in the table below: there has been no change to the segments during the period (after aggregation).

The performance of the operating segments is assessed by reference to their gross profit before exceptional items. Exceptional items are reported separately in note 8.

There are no intersegment sales. All revenue is from external customers.

Other segments represent the sale of Funkin cocktail solutions, rental income for vending machines, the sale of ice-cream and other soft drink related items. In the six months to 27 July 2014 this segment also included income from water coolers for the Findlays 19 litre water business. This business was disposed of in the second half of the year to 25 January 2015.

The gross profit before exceptional items from the segment reporting is reconciled to the total profit before income tax as shown in the consolidated condensed income statement.

All of the assets of the Group are managed by the management committee on a central basis rather than at a segment level. As a result no reconciliation of segment assets and liabilities to the consolidated condensed statement of financial position has been disclosed for any of the periods presented.

7. Seasonality of operations

Historically, approximately half the revenues and operating profits are expected in each half of the year.

8. Operating profit

The following items have been charged to operating profit during the period:

Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completing production and selling expenses.

During the six months to 27 July 2014 the contract for the production and selling of Orangina was terminated by the recently formed Lucozade Ribena Suntory Group. This resulted in compensation of £0.7m being received by A.G. BARR p.l.c. This has been shown on the consolidated condensed income statement as other income.

The following exceptional items have been charged or credited before operating profit:

During the six months to 27 July 2014 A.G. BARR p.l.c. announced the closure of its manufacturing site at Tredegar. This resulted in an impairment charge of £1.4m in respect of buildings and plant at the site with a further £0.1m charge in the second half of the year ended 25 January 2015. £3,000 of redundancy related costs were incurred in the six months to 27 July 2014 with a further £1.0m of redundancy costs provided for. A further £0.5m was incurred in the second half of the year to 25 January 2015.

Redundancy, recruitment and training costs in relation to the finance, telesales, distribution, demand and supply planning operations within England were incurred during the six months to 27 July 2014 and year ended 25 January 2015 and treated as exceptional.

As a result of the finance, telesales, distribution, demand and supply planning reorganisation, a curtailment in the Group's retirement pension plan arose in the 6 months ended 27 July 2014 and year ended 25 January 2015. This resulted in an exceptional credit arising from the reduction in the retirement benefit obligation following a reduction in the number of employees remaining with the scheme. The value of this credit was £0.5m.

9. Tax on profit

The interim period tax charge is accrued based on the estimated average annual effective income tax rate of 21.0% (six months ended 27 July 2014: 22.3%; year ended 25 January 2015: 22.3%).

The Chancellor announced in his Summer Budget on 8 July 2015 that the main rate of corporation tax will be reduced to 19% from 1 April 2017 and 18% from 1 April 2020 and the future current tax charges will reduce accordingly. These changes are contained in the Finance Bill 2015 which is not expected to be substantively enacted until October 2015 and at that point the changes will be reflected in the Company's deferred tax liabilities.

10. Earnings per share

Basic earnings per share have been calculated by dividing the earnings attributable to equity holders of the parent by the weighted average number of shares in issue during the year, excluding shares held by the employee share scheme trusts.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the period. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

The underlying EPS figure is calculated by using profit attributable to equity holders before exceptional items:

This measure has been included in the financial statements as it provides a closer guide to the underlying financial performance as the calculation excludes the effect of exceptional items.

11. Dividends paid

An interim dividend of 3.36p (an increase of 8% on last year) per share was approved by the board on 22 September 2015 and will be paid on 16 October 2015 to shareholders on record as at 2 October 2015.

12. Held for sale assets

The property, plant and equipment related to the manufacturing site at Tredegar have been presented as held for sale following the decision to close the site. The property, plant and equipment was sold during September 2015 (note 22).

13. Acquisition of subsidiary

On 2 February 2015, the Group acquired 100% of the share capital of Funkin Limited ('Funkin'), a company which offers a broad range of premium cocktail solutions including fruit purées, cocktail mixers and syrups.

In the six months to 25 July 2015, Funkin contributed revenue of £4.9m and an operating profit of £0.7m to the Group's results. Had Funkin been consolidated from 26 January 2015, the consolidated condensed income statement for the six months ended 25 July 2015 would not be materially different.

Consideration transferred

The following table summarises the acquisition-date fair value of each major class of consideration transferred:

Contingent consideration

The Group has agreed to pay the former owners of Funkin a contingent consideration based on achievement of certain financial targets by Funkin in the two years from the date of its acquisition by the Group. The potential undiscounted amount of all future payments that the Group could make under the acquisition agreement is between £nil and £4.5m.

The fair value of the contingent consideration arrangement of £4.5m was estimated by assessing the expected growth of Funkin over the two years trading post acquisition. No discount rate has been applied to the fair value estimate of the contingent consideration as due to the short time period the effect of discounting has a negligible effect on the fair value.

The fair value of trade and other receivables is £1.4m and includes trade receivables with a fair value of £1.2m. The gross contractual amount for trade receivables due is £1.3m of which £0.1m is expected to be uncollectible.

The fair value of the acquired identifiable intangible assets of £7.2m, is provisional pending receipt of the final valuations for those assets. A deferred tax liability of £1.5m has been provided in relation to these fair value adjustments in relation to intangible assets.

Acquisition-related costs

The Group incurred acquisition-related costs of £0.7m relating to external legal fees and due diligence costs. These costs have been included in operating costs in the consolidated condensed income statement.

Recognised amounts of identifiable assets acquired and liabilities assumed

None of the goodwill arising on the acquisition is expected to be deductible for tax purposes.

The goodwill of £15.7m arises from a number of factors including expected synergies through combining an experienced senior team and obtaining greater production efficiencies through knowledge transfer; marketing expertise; obtaining economies of scale by cost reductions from purchasing efficiencies; price reductions and greater volume rebates from suppliers; sales synergies arising from introducing Funkin to A.G. BARR's route to market and sales channels; and unrecognised assets such as the workforce.

14. Intangible assets

The additions for periods presented represent goodwill and other intangible assets acquired as part of the acquisition of Funkin (note 13), internally generated software development costs and third party consultancy costs incurred in relation to the Business Process Redesign project.

The amortisation charge for the six months to 25 July 2015 represents £0.2m (six months ended 27 July 2014: nil; year ended 25 January 2015: nil) of charges in relation to the Business Process Redesign project, £0.1m (six months ended 27 July 2014: £0.1m; year ended 25 January 2015: £0.3m) of charges for the Rubicon customer list and £34,000 of charges for the Funkin customer list.

15. Property, plant and equipment

The closing balance includes £0.6m (as at 27 July 2014: £2.5m; as at 25 January 2015: £6.7m) of assets under construction.

16. Financial instruments

Current assets of £20,000 (at 27 July 2014: £nil; 25 January 2015: £0.1m) relate to forward foreign currency contracts with a maturity of less than 12 months and are classified as fair value through the cash flow hedge reserve.